Updated: Jun 5
Oracle is experiencing relatively flat revenue growth, and the company cut 1,300 jobs in March of this year. Executive salaries have been slashed, and its annual OpenWorld conference was moved to Las Vegas because San Francisco was deemed “too expensive.” To shore up earnings, we anticipate more hard-lined sales policies under CEO Safra Catz. For example, we’ve observed an uptick in double-digit percentage increases on renewals, as opposed to the industry’s more typical 5%.
Oracle is looking to its cloud infrastructure for growth. This includes infrastructure as a service (IaaS) and platform as a service (PaaS) product offerings. Although Oracle has 2% of the cloud market (with AWS and Microsoft claiming a combined 51%), Oracle is gunning for third place in this $96B industry. On the recent earnings call, Founder Larry Ellison stated the company’s go-forward plan is to move from the antiquated business model of on-premise software and maintenance services to a subscription-based model that taps the benefits of cloud computing. Further, the vendor announced plans to have more data centers than Amazon by year-end.
Customers are being incentivized to use Oracle cloud infrastructure via Universal Cloud Credits (UCC) program, which calls for a monthly spend commitment that can be used for long list of IaaS and PaaS options. (Caveat emptor: if you don’t use your monthly credits, you forfeit them.) We have seen UCC case volume surge by 40% in the last year, and we expect even more cases this year.
Oracle has achieved marked success with Fusion ERP and NetSuite, which showed year-over-year growth at more than 30%. Customers are signing Enterprise License Agreements for Fusion that span 7-10 years and they are not limited to a pre-set product quantity. Existing Oracle application customers that sign ELAs can forego their perpetual application support costs for those applications being migrated to the cloud, provided their cloud spend is 3X that of their annual support bill.
Other Oracle tactics that keep customers at the table include:
Using audits as a way to persuade customers to purchase cloud offerings
Significant discounts on on-premise software, if the customer makes a cloud purchase
Perpetual Unlimited Licensing Agreements (PULAs), which lock customers in long-term
Uncovering investment upsell and audit opportunities via consulting services from Software Investment Advisory, positioned as a service to help customers optimize their Oracle investments.
In terms of our expectations for 2020, Oracle will:
Offer more flexibility around strict support services and pricing rules, in exchange for strategic new investments such as ULAs and OCI
Target Fusion ERP customers to buy more Oracle products
Use Autonomous Database to “land and expand” Oracle footprint in customers’ enterprise
Lure ERP customers away from SAP and Workday
Given Oracle’s pressure to get customers to spend more and migrate to the cloud, we’ve composed a list of three best practices for preserving leverage when dealing with this vendor.
1. Forecast and modeling. We urge clients to build their own demand model to prevent the vendor from taking the lead and inflating your deal. However, in situations where Oracle is driving these activities and timing is limited, we suggest risk-adjusting Oracle’s forecast. Following is an example of an Oracle ELA proposal for a seven-year Fusion Cloud transformation deal that we recently became involved in.
We advised this client to take out products they would not be using day one and opt for a ramped deployment. It takes most companies between 3 and 12 months to implement cloud services, and clients shouldn’t be paying for services that are not live. The client’s transition from on-premise to cloud may take 2-3 years and this timeline should be reflected in the deal cost. We also urged the client to leverage the new deal opportunity to adjust the forecast of existing cloud services being rolled into the new deal, and remove or reduce quantities if internal assessment revealed low usage to-date. Lastly, we advised the client to re-inspect all the new products in which they had low deployment confidence and move them under a price hold to buy in the future, vs. as part of an upfront deal. By following these suggestions, the customer was able to adjust the Oracle forecast and shave $47M off the deal, as indicated in the following chart.
2. Pricing analysis. In June of last year, the vendor changed its Fusion Cloud pricing by putting together new bundles, making it significantly more expensive to obtain individual applications.
We counsel clients to consider which features of a bundle are relevant to the organization. If only a few are needed, clients should propose a deep discount because the bundle holds significantly less value for them.
3. Supplier knowledge. It is important to understand the vendor’s sales process so it can be leveraged against them. Not only is an Oracle sales team competing against other vendors for your business, but it also competes against other Oracle sales teams. There’s a sales team for every Oracle product and they often overlap. For example, both the NetSuite ERP sales team and the ERP/EPM Cloud sales team sells ERP, HCM, SCM and EPM applications. Clients can leverage these competing parties within the vendor organization to achieve the best discounts.
For more information about Oracle, view our supplier briefing webinar here or contact your ClearEdge representative.
Principal Analyst Tanya Lutsyuk and Senior Analyst Joe Malarney of ClearEdge contributed to this blog.